Share story

CHICAGO — The Securities and Exchange Commission (SEC) gave final approval yesterday to a controversial rule designed to guarantee investors the best price when buying and selling stocks.

The rule extends to the Nasdaq stock market the so-called trade-through rule, which requires that trades, with few exceptions, be sent to whatever market has the best available price for immediate execution, rather than allowing investors to choose faster execution.

“The trade-through rule is, in the most fundamental sense, a rule that protects investors,” said SEC Chairman William Donaldson. “The problem of trade-throughs is a real one, particularly for small investors who cannot easily monitor the behavior of their agents.”

Although some institutional investors supported the plan, others, including the adviser to the Fidelity mutual funds, opposed it. They said they should be able to opt out of the rule so they wouldn’t have to parcel out large orders, which could ultimately lead to less advantageous prices as market conditions change.

Commissioners voted 3-2 in favor of the rule, with Republicans Paul Atkins and Cynthia Glassman dissenting. They called the rule an unnecessary intrusion into a well-functioning marketplace, and one that could have unintended consequences of stifling innovation and competition.

Glassman said only about 2 percent of orders were traded through in 2003, often with a penny or two difference in price.

“These numbers tell me that trade-throughs are not a significant problem,” she said.

Donaldson disagreed, saying, “I can think of no other area of the securities laws where we would consider it beneath our care to focus on a problem that only occurs once in 40 times.”

SEC officials said the rule, which takes effect next spring, would impose about $144 million in one-time costs on markets, through developing new procedures, market surveillance and other costs, along with $22 million in annual costs. Investors, however, would see annual savings of $321 million per year, they said.

Glassman said the annual volume of trades on the Nasdaq and New York Stock Exchange — which already had a trade-through rule — totals nearly $19 trillion, adding, “$321 million is only a rounding error.”

The rule has sparked some strong opposition on Capitol Hill. Rep. Richard Baker, R-La., chairman of the House Financial Services capital-markets subcommittee, said it “ranks up there with the worst public policy I have seen in my nearly two decades in Congress.”

The SEC also ordered a study to examine whether it should seek legislation to put brokers and planners under the same rules, among other issues. Many consumer advocates and planners had hotly contested the rule, saying there shouldn’t be different standards.

Under the new rule, brokers’ financial advice must be “incidental” to their brokerage services, and they must tell customers that their accounts are brokerage accounts, among other disclosures.